Capital Markets

Exposed and Disclosed: Filings Show Ties to Turmoil

Companies use 8-Ks, press releases, and earnings calls to reveal any exposure to failing financial institutions — or even the lack of it.
Sarah JohnsonSeptember 18, 2008

The influx of regulatory filings in Washington is beginning to capture some footnotes to Wall Street’s horror story.

Overall, the number of disclosures reflecting Lehman Brothers’ toppling on Monday was at first minimal. But filings began streaming in after the federal government’s $85-billion infusion to save American International Group. Companies — both financial and non-financial — have shared in their reports that they have either holdings in, or connections with, one or the other company. And sometimes the filings just observe that they have no relationship whatsoever.

Toward the end of the week, moreover, the disclosures not only revealed companies’ exposures to Lehman and AIG, but to the bailed-out mortgage companies Fannie Mae and Freddie Mac, along with other companies that are reported to be similarly vulnerable if the financial crisis continues.

For instance, Proassurance Corp. revealed in a press release its exposures to financial institutions “recently in the headlines.” The medical liability insurer not only reported holding stocks and bonds of Lehman, Freddie Mac, Fannie Mae, and AIG, but noted that it also owns some of Washington Mutual’s debt. The savings and loan giant is reportedly trying to sell itself.

News of Conseco Inc.’s holdings of WaMu and other troubled firms sent its stock declining by 42 percent on Wednesday. As for Proassurance, it plans to continue sharing the breakdown of its portfolio’s holdings in these financial institutions each quarter. The insurer has sold $2 million of its WaMu debt and $3 million of Lehman debt since late August. It still holds $21.6 million Lehman senior notes.

After AIG’s news on Wednesday, several companies came forward to detail their connections to the insurer. Aetna Inc., for one, revealed that its $12.7 billion investment portfolio includes Lehman and AIG debt securities totaling $134 million. “The company is continuing to assess the recoverability of these investments,” the health-insurance giant said.

There are also companies that reported having no exposure to the companies most frequently mentioned in the press during this period of turmoil. In its earnings guidance for 2009, Black Hills Corp. said it expects “no material impacts due to financial market issues related to Lehman, AIG, or others.” In a Wednesday 8-K, Magellan Health Services said that after inquiries into its possible ties to recent financial markets’ losses, the company feels a need to say it has “no direct exposure” to Lehman, WaMu, or AIG.

Also, National Rural Utilities Cooperative Finance Corp. disclosed its relationships with Lehman and its subsidiaries, which are counterparties to seven interest rate swaps worth $17 million, and are responsible for $239 million of its $3.65 billion revolving credit facility. Further, the organization disclosed that it had no investments in the other high-profile firms that had fallen apart.

The latest flurry of financial turmoil-related 8-Ks extends beyond financial services firms. Energy company Kinder Morgan said its connections to Lehman and AIG should not have an adverse effect on its access to capital or its financial results. Lehman provides less than 5 to 10 percent of three of Kinder Morgan’s credit facilities worth billions of dollars. The companies’ executives are expected to talk about these issues at an investor conference over the next two days.

While AIG subsidiaries provide some insurance coverage to Kinder Morgan — including directors and officers liability coverage, property and liability coverage and business interruption insurance — the company doesn’t believe the coverage will stop. And, if it did, “we believe we would be able to replace the coverage provided by the AIG insurance subsidiaries without significant impact.”

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